Dissecting the First Actively Managed ETF

The listing of the Grail American Beacon Large Cap Value ETF is an evolutionary step for actively managed mutual funds. The ETF wrapper, as opposed to the traditional mutual fund, allows for more flexibility in buying or selling shares. With traditional funds, orders are executed once a day after the close of trading, whereas ETFs can be bought or sold at any time.

Another big feature is transparency. Holdings are updated daily on Grail Advisors' Web site with a one-day lag. With mutual funds, there can be a three- to six-month lag. It wouldn't have been shocking to have looked under the hood of value funds two years ago and found a majority to be heavy in large cap financial stocks, which turned out to be the worst segment to own.

A final advantage is that ETFs are cheaper. Expenses for Grail American Beacon Large Cap Value ETF are capped at 0.79% of assets.

Does it make sense to consider this type of fund for a diversified portfolio? The biggest disadvantage is that there's no way to know how the fund would fit into a portfolio in the future.

Six months from now many of the characteristics of the fund could be different. It likely will always be a proxy for large cap value, per its mandate, but the sector makeup could change, the average market cap could be different or the fund could increase or decrease its exposure to American depositary receipts, for just a few examples. With so many variables, it makes incorporating the fund into a portfolio tailored to address future market expectations difficult to do.

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